Our Gold Outlook 2024 analysed three economic scenarios and their likely effect on gold in 2024. One of these scenarios focused on the consensus view that a soft landing would be engineered in the US and Europe; China’s growth would be soft; inflation risks would abate but longer maturity interest rates would remain stubbornly elevated, and high prices would restrain consumer demand.
In this context, gold performance could be lacklustre and any upside may depend on continued central bank demand. However, the dramatic move in interest rates and policy expectations following a volte face by the Fed in December may have increased the inflation resurgence risk.
Financial conditions have eased markedly on the back of the bond market rally but market expectations of policy rate cuts seem excessive- a concern some Fed officials have voiced since the December meeting and the tensions around the Suez Canal have highlighted how continuing geopolitical factors can have swift inflationary (cost-push) implications.
Although we still view a material resurgence of inflation as a remote possibility, this scenario would likely be longer-term positive for gold, as it undermines monetary policy and risks an even harder landing further down the road.
In 2023, gold played more to the tune of the 2-year Treasury yield (real and nominal), than the historically more important 10-year yield, something that tends to occur during heightened policy uncertainty. This anomaly diminished during the summer, as peak rates appeared more certain and supply issues focused attention on the back-end of the yield curve.
Over the last few weeks, however, it appears we‘ve seen a shift back to monetary policy, perhaps highlighting the perilously narrow path to an economic soft landing said, the World Gold Council in their Gold Market Commentary for the month of December 2023.
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